Why some companies warn they will earn less than expected

We get pretty regular updates on what publicly traded companies think about this economy — quarterly, in fact, when they release their financial results. Over the past few weeks, a number of companies have warned investors that in the coming quarters their revenues and profits will not be as good as they had expected.

But why is that exactly? Start with the fact that people aren’t buying as many things that were popular at the start of the pandemic, like casual clothes.

“We’re starting to see – and have seen – a shift to services as consumers return, in terms of entertainment, travel and dining,” said Christina Boni, analyst at Moody’s.

Many consumers are also cutting back on their spending due to higher prices, especially when it comes to discretionary purchases.

“We are talking about decoration, aren’t we? Small appliances, things that you would use in your kitchen or in your living room, those types of items,” Boni said.

This happens most among middle-to-low-income consumers, Boni added. In fact, retailer Gap recently said inflation hurt sales of its cheaper brands.

Businesses know that consumers won’t be able to keep spending forever, according to Lindsey Piegza, chief economist at Stifel. “Consumers have already consumed much, if not all, of their pandemic savings.”

As a result, Piegza said, many companies fear raising prices too high, so they are looking for ways to cut costs.

“When we talk about investing, when we talk about hiring, we’re just starting to see the first indications of companies responding by cutting back,” she said.

It’s also starting to affect businesses that sell to other businesses, such as social media platforms, where consumer-facing businesses advertise.

“If businesses fear a downturn, it becomes a self-fulfilling prophecy. They’ll pull out – the first thing they’ll pull out is advertising,” said Wedbush Securities analyst Dan Ives.

Social media company Snap recently lowered its revenue forecast as “the macroeconomic environment has deteriorated further and faster than expected,” he said.

That means businesses are spending less on ads, Ives said. “That’s why when Snap warned, the concern is that this is just the first shoe to fall” as consumer spending softens.

This sweetness could start to appear with other technology platforms, he added, such as Google, Facebook and Twitter.

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